Donating Money to Get Money: The Role of Corporate Philanthropy …sslab.nwpu.edu.cn/uploads/1540469333-5bd1b255d2604.pdf · 2018. 10. 25. · corporate philanthropy and CFP; however,

Donating Money to Get Money: The Role of CorporatePhilanthropy in Stakeholder Reactions to IPOs

Ming Jia and Zhe ZhangNorthwestern Polytechnical University; Xi’an Jiaotong University

ABSTRACT This study examines how stakeholders’ investment time horizons interact withinformation about corporate giving in initial public offering (IPO) firms. Specifically, we builda model that explains how corporate philanthropy affects IPO performance. We find that atthe IPO-preparation stage, corporate giving is negatively related to underwriter prestige,venture capital investment, and IPO financing costs. We also find that at the IPO-issuancestage, negative media coverage of IPOs moderates the U-shaped relationship betweencorporate giving and market premiums. At the IPO-trading stage, we find that corporategiving only positively influences the market premiums for IPO firms that are the subject ofnegative media reports. Our findings contribute to the signalling theory by showing howvarious stakeholders interpret the same signals differently, and they have implications forunderstanding how the relationship between corporate philanthropy and corporate financialperformance materializes in the IPO markets.

Keywords: corporate giving, IPO performance, negative media reports, time horizons

INTRODUCTION

Considerable organizational research over the last 40 years has studied the economicconsequences of corporate philanthropy and whether it pays to be good (e.g., Barnettand Salomon, 2012; Friedman, 1970; Wang and Qian, 2011). However, the relationshipbetween corporate philanthropy and corporate financial performance (CFP) is quitecomplex, and there is no definitive conclusion (Margolis and Walsh, 2003). For instance,in an analysis of listed Chinese corporations, Wang and Qian (2011) found a positiverelationship between corporate philanthropy and CFP, but Wang et al. (2008) found aninverse-U-shaped relationship based on a US sample. Recently, meta-analysis on theeconomic consequences of corporate social performance, which includes philanthropicactivities, found a positive but modest relationship with CFP (Aguinis and Glavas, 2012;Margolis et al., unpublished data; Wood, 2010).

Address for reprints: Zhe Zhang, School of Management, Xi’an Jiaotong University, No.28 Xianning EastRoad, Xi’an 710049, China ([email protected]).

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These inconsistent findings are the result of assuming a direct association betweencorporate philanthropy and CFP; however, they may also be a function of differingresponses to corporate philanthropy, even within stakeholder groups (Schuler andCording, 2006). Consequently, some scholars suggest an indirect relationship betweencorporate philanthropy and CFP and call for research into the mediating mechanisms(Devinney, 2009; Margolis et al., unpublished data; Peloza, 2009).

We pursue this unprecedented research by examining a unique set of variables in aunique organizational context to explore how information about corporate philanthropyinfluences stakeholders of young entrepreneurial corporations in the initial public offer-ing (IPO) market. During IPOs, information asymmetry is a serious issue that substan-tiates the importance of sending effective signals (e.g., disclosing information aboutcorporate philanthropy in the prospectus) to various stakeholders. The IPO context thusallows us to see how different stakeholders respond to the same information aboutcorporate philanthropy.

We derive a sample of IPO issuers on Chinese exchanges for the two years afterSeptember 2009, when the stock exchanges for young, entrepreneurial corporationsopened. Previous work in this field is mostly in Western contexts such as the UnitedStates and European countries (e.g., Certo et al., 2009; Margolis et al., unpublisheddata). Although the conceptual arguments in this study are quite general, a transitioneconomy provides a useful sociopolitical context to demonstrate how institutions shapethe way audiences interpret signals.

Moreover, although the general Chinese IPO procedure is similar to that ofWestern countries, the Chinese Securities Regulation Committee (CSRC) has discre-tion to decide which firms go public. The resulting potential for political manipulationinfluences stakeholders’ interpretation of corporate giving to government agenciesbefore a Chinese IPO. Corporate philanthropy may have a stigma in this context, inthat it does not aim at improving social welfare but rather ingratiates corporations withthe government in order to achieve successful IPOs. These perceptions about corpo-rate philanthropy in China ( Jia and Zhang, 2013a) therefore let us observe how spe-cific factors relevant to the relationship between corporate philanthropy andstakeholder reactions differ from Western experiences. Furthermore, many scholarsemphasize the importance of successful IPOs – a significant milestone in the life of anentrepreneurial venture – on subsequent corporate financial performance and survival(Certo, 2003; Martens et al., 2007).

This research thus touches on three important, unanswered, theoretical questions. First,how does information about corporate philanthropy influence various stakeholders’reactions? Previous theories mainly take stakeholder awareness of corporate philanthropyfor granted (e.g., Wang and Qian, 2011; Wang et al., 2008). IPO ventures do discloseinformation about their pre-IPO corporate philanthropy in their prospectuses, butstakeholders such as underwriters, venture capitalists (VCs), institutional investors, andretail investors become aware of and think about the information differently, whichinfluences their reactions, as reflected in IPO performance.

Previous studies mainly assume that corporate philanthropy provides direct cash-flow benefits to corporations and thus results in good CFP (Peloza, 2009), which is onlytrue if stakeholders perceive information about corporate philanthropy as good and

M. Jia and Z. Zhang2


exhibit supportive behaviour towards those firms in return. Whether corporate phi-lanthropy is ‘good’ or ‘bad’, however, depends on the stakeholders’ investment hori-zons, but few studies consider that an important factor in whether companies derivetangible benefits from stakeholders (Doh et al., 2010; Ioannou and Serafeim, 2010) inthis context.

The IPO process typically involves multiple stakeholders with varying investment timehorizons. These time horizons can determine, for instance, whether a prestigious under-writer leads a particular offering, whether VCs invest in the IPO, how institutionalinvestors evaluate the new security, and when retail investors buy the stock. Understand-ing how information about corporate philanthropy interacts with stakeholder time hori-zons in specific institutional contexts thus provides a chance to explore how corporatephilanthropy affects specific stakeholder reactions.

This leads to our second theoretical question: how does corporate philanthropyinfluence the intermediate outcome between corporate philanthropy and CFP? Further-more, how does IPO research overlap with corporate philanthropy research? Wood(2010) recommends deliberately incorporating research and thinking from otherdomains into the corporate philanthropy literature, and we follow this recommendationby integrating IPO literature with corporate philanthropy. To our knowledge, this studyis thus the first systematic, large-sample test of whether corporate philanthropy influencesthe performance of IPOs.

Based on our framework, we develop and test three arguments. Our first argument isthat in the IPO-preparation stage, IPO firms engaging in corporate philanthropy attractless prestigious underwriters, acquire less VC investment, and have lower IPO costs. Oursecond argument is that when companies go public, there is a U-shaped relationshipbetween the issuer’s degree of philanthropy and institutional investor sentiment, basedon the issue’s market valuation premium. Moreover, in response to calls for studies onhow negative signals affect issuers’ intentional signalling processes (Bell et al., 2008), weevaluate how negative media reports affect how investors react to information aboutcorporate philanthropy. Our third argument is that information about corporate phi-lanthropy affects the issuance and trading premiums for IPOs that receive negativemedia coverage.

Although we learn much from Wang and Qian (2011) (WQ hereafter), there are threesignificant differences in this study. First, we mainly contribute to signalling theory; WQis based on stakeholder theory. WQ also takes stakeholder awareness of corporatephilanthropy for granted. Our study relaxes this assumption and follows Schuler andCording (2006) to introduce awareness of corporate philanthropy as an importantconstruct that determines stakeholder reactions to firms. Unlike WQ, which treatsstakeholders as a single group, our study categorizes stakeholders into underwriters, VCs,institutional investors, and retail investor groups. We also introduce the concept ofinvestment time horizons and use it to create a model that explains shareholders’differing reactions to the same information about corporate philanthropy.

Second, WQ follows a traditional line of research by testing the direct relationshipbetween corporate philanthropy and CFP. Our study turns to an indirect approach andfocuses on the intermediate outcomes by exploring the impact of corporate philanthropyon stakeholder behaviours. Third, WQ uses large, established firms; we sample young,

Corporate Philanthropy and IPOs 3


entrepreneurial IPO firms. Clearly, a reliance on large, established firms leaves theresearch community vulnerable to offering prescriptions that might not apply to IPOcorporations (Wang and Bansal, 2012).

In the following sections, we first discuss research setting. Next, we develop theoreticalarguments that explain why and how corporate philanthropy influences stakeholderbehaviours in the IPO market. We then develop and empirically test our hypotheses.Discussion follows the empirical results.

THEORY AND HYPOTHESES DEVELOPMENT

IPO Process

An IPO provides the first opportunity to observe stakeholder reactions to publiclyavailable information about a firm’s strategy and structure (Certo et al., 2009). TheChinese IPO process is similar to the process in the West; both include preparing forthe IPO, selecting underwriters, building the book, setting the offer price, allocating theshares, and trading on the secondary market (for more details, see Certo et al., 2009).However, in contrast to the Securities and Exchange Commission’s registration require-ments for new offerings in the United States, IPOs in China are subject to approval bythe CSRC (Tian, 2011). The CSRC examines the quality of new securities, includingevaluating their issuers’ profitability and risks. Only after receiving CSRC approval cannew issuers begin building their books and start the IPO process. Figure 1 summarizesthe IPO process in China.

Analysis Framework

During the IPO process, the major objectives are to mitigate information asymmetrybetween issuers and stakeholders. Key to this is the disclosure of financial and non-financial information. A scarcity of information about an issuer forces stakeholders torely heavily on these documents, which often contain only one to three years of financialinformation.

Many firms include philanthropy information in their filings (Arya and Zhang,2009; Dhaliwal et al., 2011). Philanthropy-related disclosures in particular provide

T-3

Corporate characters

T-2

Corporate philanthropic

giving

T

CSRC examination and approval of IPO

T+1

Setting IPO issuing price and issue market

valuation premium

T+2

First-day trading and retail market valuation

premium

T-1

Involving IPO agents: select underwriter and invite venture capital

One year pre-IPO:data from prospectus and

CSMAR database

IPO year: data from prospectus , CSMAR database

and CSRC reports

IPO trading: data from stock market and CSMAR database

Figure 1. Timeline of IPO process



non-financial information about firm value, and stakeholders can use this information toestimate future performance. For example, Dhaliwal et al. (2011) find that CSR-relatednon-financial disclosure provides useful information to analysts and investors. However,not all of the stakeholders are aware of the information (Schuler and Cording, 2006).Various stakeholders during the IPO process, including underwriters, VCs, financialanalysts, institutional investors, and retail investors, even possess different capabilities toaccess it.

Moreover, because corporate philanthropy reflects a firm’s consideration for stake-holders and social welfare (Barnett, 2007; Wang and Qian, 2011), stakeholders inWestern countries tend to regard the presence of corporate philanthropy positively(Suchman, 1995; Zimmerman and Zeitz, 2002) and increase their support for philan-thropic companies (Barnett and Salomon, 2012). Wang and Qian (2011) also providesupport for the positive relationship between corporate philanthropy and CFP in Chinaby assuming corporate philanthropy elicits positive stakeholder responses.

However, we believe, if we focus on how various stakeholders actually interpret thesame information about corporate philanthropy in the Chinese context, we would get avery different picture. The analysis evolves from two questions. First, how does knowl-edge of corporate philanthropy interact with stakeholders’ investment time horizons andthen affect support for those IPO ventures? This study evaluates two kinds of investmenttime horizons: short-term and long-term (Arthurs et al., 2008). Unlike stakeholders withshort-term horizons, stakeholders with ‘long-term horizons have a continuing interest inpreserving the organization’s asset base, including its cash resources, knowledge struc-tures, and organizational relationships for generating future profits’ (Arthurs et al., 2008,p. 282).

Second, how does the Chinese institutional context shape how audiences interpretinformation about corporate philanthropy? Although corporate philanthropy helps cor-porations build relationships with governments, which generates benefits in the longterm (Wang and Qian, 2011), stakeholders with short-term horizons view those effortsnegatively. Moreover, the Chinese context supports the view that philanthropy has astigma ( Jia and Zhang, 2013a); that is, that corporate philanthropy signals a lack oflegitimacy.

For example, Ding Shumiao, a businesswoman involved in the corruption case offormer Chinese railway minister Liu Zhijun, was a well-known Chinese philanthropistbefore her arrest. Ding admitted giving more than 40 million yuan to Fan Zengyu, adirector from the Poverty Alleviation and Development Office of the State Council. Dingsaid she provided the funds to Fan upon his request. In exchange, Fan granted Dingcharity awards and helped polish her company’s public image in an effort to avoidinspections from authorities’ (Bai, 2013). We thus extend the signalling theory by inte-grating the institutional context with stakeholders’ investment time horizons to under-stand why various stakeholders interpret the same information about corporatephilanthropy differently.

Furthermore, we recognize that several ventures receive negative media reports beforetheir IPOs. These reports potentially conflict with the messages issuers are trying to sendby disclosing information about corporate philanthropy, though they may correlate withan unobservable characteristic that is valuable to stakeholders (Bell et al., 2008). We thus



would like to see how negative media reports disturb or enhance the signalling processinvolved in disclosing corporate philanthropy information.

As shown in Figure 2, our study divides the IPO process into three stages: preparation,issuance, and trading. Based on the stated analysis framework, we explore how informa-tion about corporate philanthropy influences stakeholder reactions during each stage.Specifically, in the preparation stage, the issuer works with underwriters, VCs, account-ants, and lawyers to prepare the filing and registration (e.g., Pollock et al., 2010). Eachstakeholder has different objectives during the IPO process. We thus explore howinformation about corporate philanthropy influences these agents’ willingness to workwith an issuer.

During the issuance stage, institutional investors pledge to purchase shares from theunderwriter at an established offer price on the date of the offering. However, how doesinformation about corporate philanthropy influence institutional investors’ evaluation ofa new issue and their willingness to buy shares (as reflected in the issues’ market-valuationpremiums)?

During the trading stage, the buying behaviour of retail investors determines thefirst-day performance of an IPO (as reflected in the retail market-valuation premium) (e.g.,Martens et al., 2007; Stuart et al., 1999). However, because retail investors only purchaseIPO shares of companies that already have their attention (Barber and Odean, 2008), howand when does information about corporate philanthropy influence their buying behav-iour and valuation premiums? In the following section, we connect the dots.

IPO Preparation Stage: Agent Reactions to Information aboutCorporate Philanthropy

When companies prepare to go public, they often struggle to provide credible signals thatdistinguish them from potential competitors and ease information asymmetry problemsbetween issuers and potential investors (Pollock et al., 2010). Effective signalling is thus a

Market translating mechanism Stakeholder reaction and IPO performance

Information of corporate philanthropy

Agents evaluation on IPO business

Retail investor buying behavior

Institutional investor reaction to information

Preparation stage: prestigious agents

and financing costs

Trading stage: retail market valuation

premium

Issuance stage: issue market

valuation premium

_

?/+

U

Figure 2. Theoretical framework



fundamental component of a successful IPO, and it includes selecting prestigious under-writers (Krigman et al., 2001; Pollock, 2004) as well as obtaining venture capital backing(Gulati and Higgins, 2003; Lee and Wahal, 2004). However, these agents often agree towork with new issuers only if the agents themselves also benefit from the relationship.

Underwriters and information about corporate philanthropy. The first step in the IPO processinvolves enlisting an underwriter to communicate with potential investors and obtainsubscriptions for the IPO. Because underwriters create a prospectus for the issuer, theyusually have easy access to information about a company’s philanthropic activities.

However, underwriters tend to have only temporary relationships with issuers(although there is a possibility for repeat business in a seasoned offering, mergers andacquisitions activity, and debt financing) as opposed to the recurring business they mayhave with institutional clients over the longer term (Pollock, 2004). Thus, underwriterstend to possess short-term investment horizons regarding IPO ventures.

Obviously, not all engagements are profitable for underwriters. Prestigious underwrit-ers are thus very concerned about taking on only clients with high pre-IPO profitabilityand low post-IPO dispersion of risk (Carter and Manaster, 1990). Accordingly, prestigiousunderwriters may look favourably on clients that do not donate much money.

From a financial perspective, corporate philanthropy is costly to Chinese firmsbecause they may have to devote a large amount of cash to government agencies beforetheir IPOs, which increases their management costs and decreases net profits. Further-more, CSRC considers profitability one of the most important factors when decidingwhether a firm qualifies for an IPO. Obtaining approval to take a company public is alsovery difficult for underwriters. In fact, a recent report shows that the CSRC has notapproved any IPOs since October 2012. As of 31 January 2013, an unprecedented 873firms were queuing for IPOs in China (Deng, 2013).

To solve the problem, the CSRC requires underwriters and CSRC-affiliated agenciesto impose stricter financial requirements on the queued companies. This is likely todisqualify a large number of applicants and makes good pre-IPO financial performance aneven bigger factor in increasing the chances of going public. Consequently, corporategiving increases underwriting risk, which lowers the interest from prestigious underwritersthat cannot afford the damage that a failed IPO could do to their reputations.

Moreover, although corporate giving ingratiates companies with government agen-cies (Wang and Qian, 2011), prestigious underwriters have strong political resourcesthat could devalue the political benefits of corporate philanthropy. Accordingly, whena prestigious underwriter is using its own ingratiation tactics on government agencies,an issuer’s corporate giving could lead to an ‘attention decrement’, diminishing theeffect of corporate philanthropy on IPO success (Pollock et al., 2010). Prestigiousunderwriters thus devalue the necessity of corporate giving if they have establishedgovernmental ties.

Furthermore, the stigma on Chinese corporate philanthropy signals that IPO venturesmay have some illegitimate, unobserved characteristics. In this situation, corporategiving may not be voluntary but rather a factor of governmental intervention. Whengovernment agencies hold up IPOs (by threatening to make the company an inspectiontarget, for example), firms donate more before IPOs in order to achieve government



acquiescence. Similar to the case of Ding Shumiao, corporate giving thus functions as anexchange between government and ventures to avoid inspections or audits. This puts thereputations of the prestigious underwriters involved in these IPOs at risk.

For these reasons, non-prestigious underwriters are sometimes better matches for newissuers that engage in pre-IPO corporate philanthropy. Non-prestigious underwriters arecompeting for underwriting business and IPO success, but they may have limited influ-ence over government agencies to facilitate IPO approval. Corporate philanthropy helpsbuild that government influence and could even compensate for an underwriter’s short-age of political resources.

Furthermore, Kim et al. (2012) provide evidence that socially responsible firms tend tobehave more responsibly when it comes to earnings management. For non-prestigiousunderwriters, this means building credibility by delivering reliable, transparent informa-tion about clients’ philanthropic activities in order to build trust with investors in the IPOmarket. Additionally, non-prestigious underwriters tend to shoulder more post-IPO riskthan prestigious underwriters, which should make them more comfortable with newissuers in the first place.

Consequently, for new issuers, we expect a relationship between corporate giving andthe prestige of the underwriter. More formally stated:

Hypothesis 1a: There is a negative relationship between corporate philanthropy andthe prestige of an issuer’s lead underwriter.

VCs and information about corporate philanthropy. Because return on investment is theirprimary concern, VCs are inherently short-term investors that want successful exits(Arthurs et al., 2008). This reduces their willingness to protect an issuer’s longer-terminterests. In support of this argument (and contrary to their expectations), Fischer andPollock (2004) find that VC ownership concentration diminishes long-term venturesurvival.

VCs generally undertake thorough due diligence efforts to understand an investment’srisks. That includes analysing prospectuses and doing independent research, whichimplies that VCs also have easy access to information about corporate philanthropy.

However, that information may actually discourage VCs from investing in IPOventures. One of the primary reasons is that the benefits of corporate philanthropymaterialize over an uncertainly long term, which contradicts most VCs’ objectives.Although previous studies find that corporate philanthropy cultivates good stakeholderrelationships, which may contribute to future performance (Barnett and Salomon, 2012;Brammer and Millington, 2008), in the short term, VCs cannot anticipate reaping thosebenefits – especially in young, entrepreneurial firms that only have a limited ability tocapitalize on stakeholder support (Wang and Bansal, 2012). The liability of newness,including a lack of sophisticated operating processes, routines, systems, and structures forefficient internal communications, as well as the knowledge to establish stable relationshipswith stakeholders (Wang and Bansal, 2012), restrains the venture’s capability to absorbstakeholder support into corporate practices and reap short-term returns.

Moreover, VCs are also very concerned about how ventures will use their capital, andthey may see corporate philanthropy as a non-core activity, a distracting use of their



money, or even fiduciary misconduct. In particular, the stigma on corporate philan-thropy in China signals to VCs that IPO ventures have opaque relationships withgovernment agencies, which increases the political risks of their capital investment. Inthese cases, VCs anticipate future government intervention, given that the governmentmay be attracted to the large amounts of cash the firms have after their IPOs.

Oversight costs are also an issue for Chinese VCs. Chinese IPO ventures are reluctantto provide board seats or cede control to VCs (Ahlstrom et al., 2007; Bruton andAhlstrom, 2003), which are still underdeveloped in China. Because most Chinese VCsare small operations, few have significant influence over IPO ventures (Ahlstrom et al.,2007; Bruton and Ahlstrom, 2003). For example, Ahlstrom et al. (2007) record aninterview with a Chinese VC who said, ‘I almost never fund deals more than a couple ofhours’ drive from my office’. The reason is that the deals in China must be monitoredvery carefully. The effort involved in monitoring philanthropic activity thus increases theVCs’ investment costs, which makes them less inclined to invest.

Consequently, VCs tend to perceive companies with records of engaging in non-corebusiness activities (including philanthropy) as higher risk and thus are more reluctant toinvest. Stated formally:

Hypothesis 1b: There is a negative relationship between corporate philanthropy andthe amount of venture capital invested in an issuer.

IPO costs and information about corporate philanthropy. Besides underwriters and VCs, otheragents, such as advisors, accountants, and lawyers, are essential for making an IPOhappen. Similar to the underwriters, these agents generally have temporary relationshipswith the issuers and look for short-term benefits from each client. Due diligence is thusvery important to these agents, who must also estimate the risks associated with anypotential issuer misconduct, such as false disclosures or fraud. The threat is real: in 2012,the CSRC punished several IPO advisors because their clients (IPO ventures) engaged infinancial fraud, such as fabricating information in IPO filings.

Accordingly, these agents spend a lot of time exploring the political and financial risksof an IPO venture to evaluate issuers’ credibility. The IPO agents earn a fee for theseefforts, and if they discover ambiguous or uncertain information, the fee often goes up.It is through this process that IPO agents gain access to and become aware of an issuer’sphilanthropic activities.

IPO agents take responsibility for the credibility of information disclosed in the IPOprospectuses, and they facilitate IPO success but do not have to guarantee futurecorporate performance. Accordingly, information about corporate philanthropy shouldreduce IPO fees for several reasons. First, the philanthropic activity itself helps buildgood relationships with government agencies (Wang and Qian, 2011), which reducescosts and effort associated with complex bureaucratic procedures and various regulatorybodies during the IPO process. Second, the stigma view substantiates the idea that theagents should care less about political risks during the IPO process. Third, large dona-tions signal that the issuer is confident that it is profitable enough to meet the CSRC’srequirements, which should mitigate agents’ concerns during due diligence. Finally,according to the hypothesized negative relationship between corporate philanthropy and



underwriter prestige, underwriters charge lower underwriting fees, which account formuch of an IPO’s cost. Taken together:

Hypothesis 1c: There is a negative relationship between corporate philanthropy andIPO costs.

IPO issuance: information about corporate philanthropy, institutional investor time horizon, andmarket-valuation premium. Institutional investors play a prominent role in the IPOprocess because they buy a majority of the equity available in IPOs (Certo, 2003).However, institutional investors can only rely on published information to evaluaterisks and rewards (Martens et al., 2007; Ritter and Welch, 2002). Market-valuationpremiums, measured as the net dollars an IPO raises, indicate institutional investors’willingness to buy shares based on their evaluation of that published information(Cohen and Dean, 2005; Martens et al., 2007; Pollock and Rindova, 2003; Stuartet al., 1999).

Generally, institutional investors use sophisticated methods to collect and evaluateissuer information. Moreover, through the book-building process, issuers and underwrit-ers communicate with institutional investors, thereby reducing the information asym-metry between them. Through this, institutional investors gain access to and becomeaware of an issuer’s philanthropic activity.

Institutional investors also tend to hold long-term positions, and so they care aboutpost-IPO performance. For this reason, underwriters with good reputations are morelikely to sell shares to institutional investors who will not quickly resell the stock (Carterand Dark, 1993; Krigman et al., 1999); this therefore reduces stock price volatility.Institutional investors often even accept lockup agreements that require them to holdtheir shares for a certain minimum period. In China, this lockup period is usually at leastthree months.

We propose that, for three reasons, information about corporate philanthropy createsa U-shaped relationship with issuers’ market-valuation premiums. First, corporationsthat increase their philanthropy increase the perceived uncertainty of their post-IPOcorporate performance, which institutional investors weight heavily in the IPO market(Ritter and Welch, 2002). Increasing corporate philanthropy is expensive (Brammer andMillington, 2008; Wang et al., 2008) and it reduces the amount of resources a companyhas (Brammer and Millington, 2008), which constrains investment budgets and under-mines growth potential (Wang and Bansal, 2012). In transitional economies, this agencyproblem is very serious, and agency costs are one of the largest motivators corporationshave to engage in philanthropy (Brown et al., 2006; Jia and Zhang, 2013a). After an IPO,managers control more free cash flow, which can spawn concerns that managers arewastefully donating precious capital to unprofitable social projects in order to benefitthemselves ( Jensen and Meckling, 1976).

Second, institutional investors can become concerned if companies cut their philan-thropy activities after an IPO. The reference-point effect shows that decision-makersjudge current behaviour based on previous or historical corporate philanthropy, regard-less of its absolute level (Fiegenbaum et al., 1996). Thus, when a corporation that



engaged in philanthropy generously before its IPO suddenly reduces that philanthropyafter the IPO, it risks disappointing stakeholders. Such an event is also newsworthy, andthe media is more likely to report it negatively (Dyck et al., 2008).

In China, the government is one of the most important stakeholders when it comes tocorporate philanthropy ( Jia and Zhang, 2013a) because it lacks sufficient funds to meetenormous social needs. It prefers that the private sector provides social services (Wangand Qian, 2011). In turn, government agencies often come to corporations for help, andthey use a company’s prior philanthropy levels as reference points to evaluate its futurewillingness to support a cause. Government agencies consequently give favours, such astax cuts or low loan rates, to companies that they perceive are ‘allies’. This generatesgreat risk, however, that future government intervention could compel corporations totake on extraordinary social burdens.

The third reason for the U-shaped relationship is that an increasing but relatively lowlevel of corporate philanthropy restricts young firms’ abilities to harvest the stakeholdersupport they garner from corporate philanthropy (Barnett, 2007; Barnett and Salomon,2012) and thus does not improve institutional investors’ perceived value. However, wepropose that corporate philanthropy above a certain threshold attracts institutionalinvestors because the philanthropy gets real stakeholder attention and support (Brammerand Millington, 2008; Wang and Qian, 2011), often via media coverage. Consequently,high levels of corporate philanthropy should help newly public firms differentiate them-selves (Wang and Qian, 2011) and accumulate stakeholder support that the companiescan harvest later (Barnett, 2007; Barnett and Salomon, 2012). Additionally, youngentrepreneurial firms are much more vulnerable to negative attacks than are largeestablished corporations. However, a high level of corporate philanthropy effectivelygenerates moral capital that can offset these unexpected negative events (Godfrey, 2005).

Finally, institutional investors understand the potential long-term value of high levelsof corporate philanthropy if firms use it to exploit opportunities (i.e., the IPO raisescapital for further growth rather than to ‘cash out’). As a result, institutional investorsshould perceive high levels of corporate philanthropy as harbingers of higher long-termbenefits, and therefore they should be willing to pay higher market-valuation premiums.Based on these arguments, we state:

Hypothesis 2a: There is a U-shaped relationship between corporate philanthropy andmarket-valuation premiums.

The moderating role of pre-IPO negative media reports. Relying on the social-constructivist roleof media, we propose that pre-IPO negative media reports moderate the relationshipbetween corporate philanthropy and market-valuation premiums.

More specifically, we propose that when an issuer is the subject of negative mediareports, the negative slope of corporate philanthropy and market-valuation premiumflattens. This is because negative media reports have two effects on institutional investors’perceptions. First, because they attract public attention (Pfarrer et al., 2010; Pollock andRindova, 2003), negative media reports decrease the information asymmetry betweeninstitutional investors and corporations. The more institutional investors know some-thing about, or are aware of, a firm’s corporate philanthropy, the more weight institu-



tional investors place on that information. Second, negative media reports increaseinstitutional investors’ uncertainty about an IPO firm’s risk (Pollock and Rindova, 2003).However, institutional investors understand that corporate philanthropy can often offsetnegative images that media reports might portray. Consequently, institutional investorsshould look more favourably on corporate philanthropy.

However, when corporate philanthropy levels exceed an inflection point, valuationpremiums should fall for companies that are the subject of negative news reports. Thereare several reasons for this.

First, although a high level of corporate philanthropy helps attract stakeholder atten-tion (Brammer and Millington, 2008), stakeholders do not like to support questionable orillegitimate corporations (Suchman, 1995) that are the subject of media criticism. Con-sequently, the benefits associated with a high level of corporate philanthropy shrinks ata certain point.

Second, when negative media coverage exists (e.g., Core et al., 2008), corporatephilanthropy levels above the inflection point tend to increase the perception that thecorporation’s managers are engaged in some sort of misconduct, which pressures thosecompanies to donate more. Third, institutional investors may also perceive that a highlevel of corporate philanthropy is an effort to counteract negative media reports (e.g.,Gan, 2006) rather than the result of altruistic motivation. Fourth, negative mediareports are sometimes a way for governments to intimidate companies into donatingmoney to government agencies in order to avoid punishment or inspection fromauthorities.

These ideas concur with the stigma view of corporate philanthropy in China, wherecorruption is a serious problem and organizations – even the Red Cross – often expro-priate or misallocate donations (New York Times, 2011). Donating large amounts ofcorporate resources to corrupt organizations does not improve social welfare; it onlyraises institutional investor concerns about managerial motivations (e.g., bribery). Thus,institutional investors’ perceived uncertainties about high levels of corporate philan-thropy increase for corporations with negative media reports.

Based on these arguments, we state:

Hypothesis 2b: The U-shaped relationship between corporate philanthropy andmarket-valuation premiums flattens for corporations that are the subject of negativemedia reports.

IPO trading: information about corporate philanthropy and retail market-valuation premium. On theirfirst day of trading, most stocks close higher than their IPO prices – a phenomenon thatfinance scholars call the ‘retail market-valuation premium’ (or underpricing) (Ritter andWelch, 2002), which is one of the most popular measurements of IPO performance(Certo et al., 2009).

The majority of investors in the Chinese retail market are individuals. Data from the2010 annual report by the China Securities Depository and Clearing CorporationLimited shows that there are approximately 45,725,312 shareholder accounts with lessthan 100,000 Ren Min Bi (RMB), which accounts for 82.78 per cent of the accounts inthe Chinese A-share market at the end of 2010 (China Clear Corp, 2010).



Although during the IPO process, we assume that, compared with the issuers, inves-tors are relatively uninformed about specific corporate characteristics, retail investorsdiffer from institutional investors in that they generally have less access to issuers’disclosures and do not possess the professional skill to analyse those disclosures. Inaddition, a 200-page prospectus often includes no more than 10 words about corporatephilanthropy, and if retail investors do not know where to look, they will usually overlookthat information.

Retail investors also tend to prefer stocks that already have their attention (Barberand Odean, 2008). Information about corporate philanthropy does not attract thatattention, because retail investors are often unaware that the information exists. Evenwhen they are aware of the information, retail investors often do not know how tointerpret it. Consequently, awareness is a serious problem for retail investors. As aresult, we do not expect corporate philanthropy to have any effect on retail market-valuation premiums.

The role of pre-IPO negative media reports in the retail market. Although the media generally doesnot tell the public what to think, it does determine what people think about (Carroll andMcCombs, 2003; Chen and Meindl, 1991). Media reports frame issues for the public(Rao et al., 2001; Rindova et al., 2006) and introduce the voices of opinion leaders suchas journalists, industry experts, and financial analysts as social proof of their views(Pollock and Rindova, 2003). Retail investors generally have easy access to mediareports, and consequently they focus their attention on the IPO ventures in the media.In turn, investors might build their perceptions of a corporation and make investmentdecisions based on media activity and news reports (Barber and Odean, 2008).

Negative media reports on topics such as environmental pollution, managerial cor-ruption, and investment failure also draw public attention to corporate activities (Pfarreret al., 2010; Pollock and Rindova, 2003). In these situations, investors have an incentiveto look for evidence that they are not throwing their money away on these companies.This is where information about corporate philanthropy can help by illustrating that theIPO venture cares about social welfare. Consequently, negative media reports canincrease the likelihood that retail investors notice information about corporatephilanthropy.

This provides an incentive for retail investors to notice information about philan-thropy for firms that are the subject of negative media coverage and thus helps retailinvestors offset the lack of legitimacy that negative media reports portray. Moreover,IPO ventures covered by negative media reports attract regulatory attention, whichincreases post-IPO risk. The stigma view supports this idea that corporate philanthropymitigates the threat of inspections by authorities. This in turn encourages retail investorsto buy the stock. Consequently, information about corporate philanthropy should influ-ence retail investor behaviour only among IPO ventures that are the subject of negativemedia reports. Based on these arguments, we state:

Hypothesis 3: For IPO ventures that are the subject of negative media reports, there isa positive relationship between corporate philanthropy and retail market-valuationpremium.



DATA AND RESEARCH METHODS

Setting and Sample

Our sample includes young, entrepreneurial firms completing IPOs on Chinese stockexchanges between September 2009 and September 2011. We collect prospectuses fromtwo sources: the official information disclosure website (http://www.cninfo.com.cn) forCSRC-authorized securities, and the CSRC official website (http://www.csrcn.gov.cn/pub/newsite/ztzl/chyeban/) for securities not authorized by the CSRC.

We extract 327 new issues from 2009 to 2011, including 267 firms approved by CSRCand 60 firms not approved by CSRC, as well as proxy statements from which we collectdata about firms’ corporate philanthropy, dependent variables, and control variables.We also search the China Stock Market Accounting Research (CSMAR) database(http://www.gtarsc.com/) for additional IPO trading data.

Because of the need to access IPO data, we confine our sample to IPO venturesauthorized by the CSRC and delete outliers. This leaves 263 firms (81 per cent of thewhole sample). Simply conducting regression analysis with this sample, however, is notappropriate (Heckman, 1979). This is because approved firms that engage in corporatephilanthropy may differ systematically from those that do not. Specifically, the factorsaffecting whether CSRC approves an IPO may be correlated with our dependentvariable – IPO performance ( Jia and Zhang, 2013b). We therefore use a two-stageHeckman selection model (Heckman, 1979) to correct for any sample-selection bias. Insuch analyses, we incorporate parameter estimates from a first-stage probit model basedon information about all the firms in a population into the second stage.

Dependent Variables

IPO agents and financing costs. We include the underwriter prestige (t − 1) and VC-backedshareholding (t − 1) variables. Consistent with prior research (Higgins and Gulati, 2006;Pollock et al., 2010), underwriter prestige (t − 1) is based on the log-transformed sum of thetimes an underwriter’s name appears as the lead underwriter in the prospectuses of IPOfirms between 2006 and 2008 on the Shanghai and Shenzhen stock exchanges. Thismeasure indicates the underwriters’ market shares in the Chinese IPO market. Severalstudies (e.g., Chen et al., 2004; Luo et al., 2010) also demonstrate the importance andrelevance of underwriter reputation in the Chinese financing market. For example, Luoet al. (2010) find evidence that a mismatch between corporate risk and underwriterreputation increases the probability of switching underwriters in a seasoned equityoffering (SEO) process.

In line with Arthurs et al. (2008), VC-backed shareholding (t − 1) is the total VC ownershipdisclosed in a firm’s prospectus. Although VC activity is significantly different in Chinacompared to the West, VC shareholding in new ventures still reflects a perception of risk(Ahlstrom et al., 2007; Bruton and Ahlstrom, 2003). Finally, ratio of IPO cost to financingscale (t + 1) is the ratio of financial expenditures to total financing scales reported on theprospectus. We use this measure to capture how much IPO agents charge issuers for theirefforts and risks.



http://www.cninfo.com.cn

http://www.csrcn.gov.cn/pub/newsite/ztzl/chyeban/

http://www.csrcn.gov.cn/pub/newsite/ztzl/chyeban/

http://www.gtarsc.com/

Issue market-valuation premium. Issue market-valuation premium (t + 1) is the difference betweenthe pre-IPO book value per share and the IPO issue price, multiplied by the number ofshares issued to subscribers, all transformed into logarithms (Martens et al., 2007; Stuartet al., 1999). This variable captures the net IPO dollars that investors in the primarymarket provide (Martens et al., 2007). In the Chinese IPO market, underwriters alsoplace some IPO shares with individual investors, which biases the measure. Moreover,multiplying by the number of shares introduces a size element that may not accuratelyreflect how institutional investors price an IPO. We deal with these issues in the robust-ness tests.

Retail market-valuation premium. Retail market-valuation premium (t + 2) is the differencebetween the per share offer price and the closing price on the first day of trading,multiplied by the number of shares issued to subscribers, all transformed into logarithms(Martens et al., 2007; Stuart et al., 1999). It represents retail investors’ valuation of anIPO stock on the secondary market. A high retail market-valuation premium reflectsretail demand for the IPO stock (the ‘hype’), reflected in the closing price on the first dayof trading.

Independent Variables

Ratio of giving to profits (t − 2). Based on Brown et al.’s (2006) study of a US sample and Jiaand Zhang’s (2013a) study of Chinese firms, we introduce ratio of giving to profits to reflectcorporate philanthropy, which is the log-transformed ratio of corporate donations tototal profits (the ratio of RMB value of company donations to total profits ∗ 100 + 1). Wecollect the charitable giving and profits data from prospectuses, which are audited beforepublication on the official disclosure website.

Moderating Variables

Negative media reports (t − 2). Previous studies suggest that negative media coverage influ-ences investor sentiment (e.g., Gordon et al., 2009; Tetlock, 2010). Using methods inprevious research (e.g., Tetlock, 2007, 2010), we measure the number of negative mediareports and introduce the negative media reports dummy (t − 2) to control the content effect.It equals 1 if the sample firm was the subject of negative media reports pre-IPO;otherwise, it equals 0.

We search for particular terms and phrases in various media sources using threedifferent databases: the Chinese newspaper database, the Baidu search engine, andGoogle. As in prior research (Brown and Deegan, 1998; Deephouse, 2000; Pollock andRindova, 2003), a trained coder assesses each article as positive, negative, or neutral inits discussion of the company. One author codes all articles and press releases for arandom subsample of 10 companies. We calculate inter-coder reliability using Cohen’skappa (Cohen, 1968), which captures the degree of agreement between two coders,adjusted for the likelihood of agreement by chance. The Cohen’s kappa is 0.89, indicat-ing high inter-rater agreement.



Control Variables

Following previous studies, we also include several controls. For example, to control thepotential agency costs of an IPO (Ibbotson and Ritter, 1995), we introduce board size andmanagerial ownership to control for the efficiency of corporate governance. Board size (t − 3)equals the total number of directors on a corporate board. Fan et al. (2007), who studyChinese IPOs between 1993 and 2001, show the importance of board members incorporate governance of IPO firms. Managerial ownership (t − 3) equals the aggregateownership of equity securities by all directors and officers of a company. For instance,Tian (2011) controls the managerial shareholding when studying Chinese IPO returnsbetween 1992 and 2004 and finds a negative but non-significant relationship betweenthem.

To control the profound political affiliation (t − 3) effect in transitional economies suchas China (e.g., Faccio, 2007; Fan et al., 2007), we follow Fan et al. (2007), who definepolitical affiliation ‘by examining whether CEO was currently or formerly an officer of thecentral government, a local government, or the military’. We then extend the definitionto include CEOs who were deputies in the People’s Congress, because this is a veryimportant political role in China ( Jia and Zhang, 2013a). Faccio (2007) also proposes thisextension. Fan et al. (2007) also support the notion that lower initial trading prices reflectCEOs’ political ties. Thus, in this study, if the sample company’s CEO is politicallyaffiliated with government agencies, the variable equals 1; otherwise, it equals 0.

To control for the possibility that IPO pricing is a function of the risk underwritersbear in the offering (Chen and Mohan, 2000), we follow Arthurs et al. (2008) and makeunderwriter spread (t + 1) equal to the underwriting fee per share. For example, Chen et al.(2006) study underwriting fees for IPOs in Taiwan and find that higher market demandfor IPO shares encourages underwriters to charge lower underwriting fees.

Following previous studies such as Arthurs et al. (2008), we control the effect of firmsize and age. Total assets (t − 3) equals the log-transform corporate assets. Cheung et al.(2009) and Tian (2011) study IPO returns in China and find a significant negativerelationship between IPO underpricing and corporate size.

We also control firm age: firm age (t − 1) equals the difference between the year ofincorporation and the IPO year. Previous studies such as Chen et al. (2004) and Tian(2011) control for firm age when studying IPO performance in the Chinese stock market,although they do not provide consistent results.

Finally, we introduce several market-related variables to control for market conditions.Stock turnover (t + 2) equals the percentage of shares offered that traded on the day of theIPO (Pollock and Rindova, 2003). Zhou (2010) examines the relationship between stockreturns and extreme trading activity in the Chinese stock market over the period1997–2005; he finds that extreme trading activity contains valuable information aboutthe short-term evaluation of stock prices.

No. of IPO monthly (t + 1) equals the number of firms in a fiscal month that have IPOs.This controls for the amount of IPO activity (Arthurs et al., 2008). For example, Lin andTian (2012) study initial IPO returns in the Chinese market and find a positive relation-ship between IPO volume and IPO initial returns, which is consistent with the ‘hot issuemarket phenomenon’.



Industry is coded based on whether the corporation belongs to the software, electrical,manufacturing, financial, retail, or services industry (Pollock and Rindova, 2003). Pre-vious studies of Chinese IPOs also show the importance of controlling for industry-levelcharacteristics (e.g., Chen et al., 2004; Cheung et al., 2009). Inverse Mills ratio is based onfirst-stage regression results to control for sample-selection bias (Heckman, 1979).

Correction for Selection Bias

We also introduce several control variables for the first-stage probit regression model. Aprobit model fits a maximum-likelihood model in which we calculate the predictedprobability of probability (IPO success of authorization = true). IPO authorization dummyequals 1 if the issuer receives authorization by CSRC; otherwise, it equals 0. Thistwo-stage approach ensures comparability with previous research (e.g., Wang and Qian,2011; Wang et al., 2008). The mean (0.82) and standard deviation (0.39) of the IPOauthorization dummy represent a high authorization rate of IPOs for entrepreneurial firms.

We include controls such as ratio of giving to profits, political affiliation, underwriter prestige,VC-backed shareholding, ratio of managerial salary to assets, ratio of Top Management Team on board,board size, managerial ownership, ratio of sales growth, ratio of debt to assets, total assets, and industrybecause these variables are proper antecedents (time-lagged) of CSRC approval.

We also include other controls in the selection models. We develop two measuresrelated to media reports. Tenor of media coverage, calculated similar to Pollock and Rindova(2003), controls for the content effect of media reports. Media coverage equals the numberof reports about a focal firm pre-IPO (Pfarrer et al., 2010). We control for IPO year, coded2009, 2010, or 2011, according to the year of the IPO.

Estimation Methods

The first stage of the Heckman process involves estimating the differences in the degreeto which various firm and industry factors predict whether the CSRC authorizes an IPO(e.g., Jia and Zhang, 2013b). We estimate the likelihood of authorization by applying aprobit model to the entire 325 firms in the sample.[1] The regression results show that tenorof media coverage, media coverage, VC-backed shareholding, and managerial ownership have signifi-cantly positive relationships with CSRC IPO approval. We calculate an adjustment termof inverse Mills ratio from the first-stage probit regression and then include the ratio as acontrol variable in the main second-stage equation (see Heckman, 1979), which exam-ines the relationship between corporate philanthropy and IPO performance using thesample of newly issued securities with CSRC authorization (263 firms).

Specifically, equation (1) tests Hypothesis 1 in the second stage:

π β β β β ε= + + + +0 1 2 3giving IMR X (1)

Equation (2) tests Hypothesis 2 in the second stage:[2]

π β β β β β= + + + +0 1 22

3 4giving giving Negative media reports Negative meedia reports giving

Negative media reports giving IMR

∗+ ∗ + +β β β5

26 77X + ε (2)



Equation (3) tests Hypothesis 3 in the second stage:

π β β β β= + + +0 1 2 3giving Negative media reports Negative media reportss givingIMR X

∗+ + +β β ε4 5 (3)

where π is IPO performance in the three IPO stages. In equation (1), π is underwriterprestige, VC-backed shareholding, and ratio of IPO cost to financing scale. According to Hypothesis1, we predict that the coefficient of β1 is negative. In equation (2), π is issue market valuationpremium. According to Hypothesis 2, we predict that the coefficient of β2 is positive andthe coefficient of β5 is negative. In equation (3), π represents retail market-valuation premium.According to Hypothesis 3, we predict that the coefficient of β3 is positive. X is a set ofcontrol variables expected to influence IPO performance with some specific time lags.[3]

Giving is a continuous variable that reflects the ratio of corporate giving to profits for each firm.IMR is the inverse Mills ratio based on the first-stage model. The ε is an error term.

RESULTS

The variables in the second-stage Heckman analysis are presented in Table I. Log-transformed values for underwriter prestige average 1.76 (on average, each underwriter leads5.09 IPOs between 2006 and 2008); VC-backed shareholding averages 13.46 per cent; ratioof IPO cost to financing scale averages 0.07 (IPO ventures spend 7 Yuan to acquire 100 Yuanof RMB through an IPO); log-transformed values for issue market-valuation premiumsaverage 20.11 (or, on average, an issue’s market-valuation premium is 542 millionRMB); log-transformed values for retail market-valuation premiums average 20.91 (or, onaverage, the retail market-valuation premium is 205 million RMB); and log-transformedvalues for ratio of giving to profits average 0.04 (that is, an IPO venture donates an average4.61 per cent of its profits to government agencies). For example, a generous IPO venturedonates 68.2 per cent of its profits. The correlation between the ratio of giving to profits andsubsequent IPO performance is negative for underwriter prestige, VC-backed shareholding, andratio of IPO cost to financing scale, but it is positive for issue market-valuation premium and retailmarket-valuation premium.

Significant correlations exist among some variables, such as managerial ownership, boardsize, and political affiliation; hence, we investigate whether there is a potential multicollin-earity problem by computing variance inflation factors (VIFs). The maximum VIF in anyof the models is 4.63 (political affiliation), and the mean VIF is around 2.60, substantiallybelow the rule-of-thumb cut-off of 10.00 for regression models (Ryan, 1997). Therefore,multicollinearity is not an important issue in our results.

Second-Stage IPO Performance Estimates

Tables II to IV present the results of Heckman’s second-stage estimation using the inverseMills ratio from the first-stage probit model, accounting for selection bias. Table IIcorresponds to the models that use agency-related measures of IPO performance: under-writer prestige, VC-backed shareholding, and ratio of IPO cost to financing scale. Multiple regressionanalysis tests the hypothesized negative relationship between corporate giving and threedependent variables.



Tab

leI.

Dep

reci

ativ

est

atis

tics

and

corr

elat

ion

mat

rice

s:H

eckm

anse

cond

-sta

geva

riab

les

(n=

263)

a

Var

iabl

esM

ean

SD1

23

45

67

89

10

11

12

13

14

15

1.U

nder

wri

ter

pres

tigeb

(t−

1)1.

761.

181

2.V

C-b

acke

dsh

areh

oldi

ng(t

−1)

13.4

613

.35

0.05

1

3.R

atio

ofIP

Oco

stto

finan

cing

scal

e(t

+1)

0.07

0.02

0.06

0.06

1

4.Is

sue

mar

ket-

valu

atio

npr

emiu

mb

(t+

1)20

.11

0.57

0.11

−0.0

6−0

.65

1

5.R

etai

lmar

ket-

valu

atio

npr

emiu

mb

(t+

2)20

.91

0.2

−0.0

1−0

.11

−0.2

70.

221

Inde

pend

ent

vari

able

s6.

Rat

ioof

givi

ngto

profi

tsb

(t−

2)0.

040.

08−0

.06

−0.0

9−0

.12

0.06

0.1

1

7.N

egat

ive

med

iare

port

sdu

mm

y(t

−2)

0.11

0.31

−0.1

60.

080.

02−0

.01

−0.0

50

1

8.B

oard

size

(t−

3)8.

661.

660.

080.

11−0

.16

0.14

0.16

−0.0

2−0

.01

19.

Man

ager

ialo

wne

rshi

p(t

−3)

60.5

822

.61

−0.0

3−0

.24

0.13

−0.1

−0.1

70.

11−0

.05

−0.2

81

10.

Polit

ical

affil

iatio

n(t

−3)

3.25

2.96

0.11

0.06

−0.1

20.

10.

070.

040

0.35

−0.2

41

11.

Und

erw

rite

rsp

read

(t+

1)1.

831.

030.

15−0

.11

0.21

0.37

−0.0

5−0

.01

0.01

−0.1

20.

09−0

.08

112

.T

otal

asse

ts(t

−3)

19.4

40.

590.

010.

08−0

.33

0.49

0.04

−0.0

30.

030.

23−0

.26

0.25

−0.0

51

13.

Firm

age

(t−

1)9.

363.

990.

100.

090.

11−0

.09

−0.0

60.

050.

010.

08−0

.09

0.01

0.04

0.06

114

.St

ock

turn

over

(t+

2)0.

570.

16−0

.06

−0.0

80.

15−0

.33

0.56

0.07

0.01

0.01

0.04

0.01

−0.1

6−0

.18

−0.0

51

15.

No.

ofIP

Om

onth

ly(t

+1)

13.5

35.

72−0

.06

−0.0

2−0

.07

−0.1

10.

330.

14−0

.07

0.13

−0.1

10.

04−0

.1−0

.13

−0.0

50.

221

16.

Inve

rse

Mill

sra

tio0.

270.

210.

02−0

.32

−0.0

1−0

.09

0.21

−0.1

60.

02−0

.02

−0.3

70.

05−0

.04

−0.1

20.

040.

150.

24

aC

orre

latio

nsgr

eate

rth

an0.

08or

less

than

−0.0

8ar

esi

gnifi

cant

atth

ep

<0.

05le

vel.

bL

ogar

ithm

.



Models 1 and 2 report the effects of corporate giving on whether prestigious under-writers lead particular offerings or VCs invest in the IPO ventures. In keeping with ourprediction, ratio of giving to profits has a negative and significant relationship with underwriterprestige (β = −1.646, p < 0.10) and VC-backed shareholding (β = −26.102, p < 0.01), whichsupports Hypothesis 1b and marginally supports Hypothesis 1a. Model 3 reports therelationship between ratio of giving to profits and IPO financing costs. As predicted, there isa significant negative relationship (β = −0.031, p < 0.05), which supports Hypothesis 1c.

Table II. Estimate for Heckman second-stage IPO agent modelsa

Independent variables Dependent variables

Underwriterprestige

VC-backedshareholding

Ratio of IPO costto financing scale

Model 1 Model 2 Model 3

Ratio of giving to profitsb −1.646* −26.102*** −0.031**(0.965) (7.789) (0.015)

Negative media reports dummy −0.706*** 4.513* −0.000(0.247) (2.473) (0.005)

Board size 0.052 −0.117 0.000(0.049) (0.496) (0.001)

Managerial ownership 0.000 −0.274*** 0.000(0.004) (0.037) (0.000)

Political affiliation 0.051* 0.119 −0.000(0.028) (0.273) (0.001)

VC-backed shareholding 0.001 – 0.000(0.007) – (0.000)

Underwriter prestige – 0.120 0.001– (0.634) (0.001)

Total assetsb −0.080 −2.134 −0.016***(0.140) (1.424) (0.003)

Firm age 0.027 0.368** 0.001*(0.017) (0.156) (0.000)

No. of IPO monthly −0.026 0.012 −0.000(0.020) (0.178) (0.000)

IPO censor year = 2010 −0.129 −6.465* −0.001(0.371) (3.372) (0.005)

IPO censor year = 2011 −0.060 −6.274* 0.018***(0.343) (3.265) (0.005)

Industry control control controlInverse Mills ratio 0.067 −42.752*** 0.009

(0.465) (4.294) (0.009)Constant 2.769 89.776*** 0.375***

(2.889) (27.949) (0.052)R2 0.122 0.375 0.312

Notes: a N = 263; standard errors are in parentheses. * p < 0.10; ** p < 0.05; *** p < 0.01; two-tailed test.b Logarithm.



Table III. Estimate for Heckman second-stage issue market-valuation premium modelsa

Independent variables Dependent variablesIssue market-valuation premium

Model 1 Model 2 Model 3 Model 4

Board size 0.029 0.031 0.028 0.031*(0.019) (0.019) (0.019) (0.019)

Managerial ownership −0.000 −0.000 −0.000 −0.000(0.002) (0.001) (0.002) (0.002)

Political affiliation −0.003 −0.004 −0.003 −0.005(0.011) (0.011) (0.011) (0.011)

VC-backed shareholding −0.003 −0.002 −0.002 −0.002(0.002) (0.002) (0.002) (0.002)

Underwriter prestigeb 0.031 0.029 0.024 0.024(0.025) (0.025) (0.025) (0.026)

Underwriter spread 0.213*** 0.216*** 0.214*** 0.216***(0.031) (0.031) (0.031) (0.032)

Total assetsb 0.492*** 0.499*** 0.497*** 0.499***(0.056) (0.056) (0.055) (0.055)

Firm age −0.020*** −0.022*** −0.020*** −0.021***(0.007) (0.007) (0.007) (0.007)

No. of IPO monthly −0.002 −0.004 −0.003 −0.002(0.005) (0.005) (0.005) (0.005)

Industry control control control controlInverse Mills ratio −0.054 0.029 0.034 0.031

(0.198) (0.203) (0.204) (0.206)Negative media reports dummy −0.091 −0.125 0.000

(0.089) (0.090) (0.000)Ratio of giving to profitsb 0.604* 0.958*** 0.915***

(0.337) (0.217) (0.251)Ratio of giving to profits squared 5.946*** 6.919***

(1.966) (2.496)Ratio of giving to profits × Negative media

reports dummy1.396***(0.504)

Ratio of giving to profits squared × Negativemedia reports dummy

−9.779***(3.416)

Constant 9.945*** 9.783*** 9.816*** 9.751***(1.186) (1.172) (1.167) (1.163)

R2 0.456 0.465 0.478 0.487ΔR2 0.009* 0.013*** 0.009***




In Table III, the dependent variable is issue market-valuation premium. In models 1 to 4,we sequentially add the following independent variables: ratio of giving to profits and itssquare term, and the interaction terms between ratio of giving to profits and its square termwith the moderating variable (negative media reports). Model 4 is the full model, including allthe interactions.

Table IV. Estimate for Heckman second-stage retail market-valuation premium modelsa

Independent variables Dependent variablesRetail market-valuation premium

Model 1 Model 2 Model 3

Board size 0.011** 0.011** 0.011**(0.005) (0.005) (0.005)

Managerial ownership −0.001*** −0.001*** −0.001***(0.000) (0.000) (0.000)

Political affiliation −0.001 −0.001 −0.001(0.004) (0.004) (0.004)

VC-backed shareholding −0.002* −0.001 −0.001(0.001) (0.001) (0.001)

Underwriter prestigeb 0.001 −0.000 −0.000(0.008) (0.009) (0.009)

Underwriter spread 0.013 0.014 0.014(0.014) (0.014) (0.014)

Total assetsb 0.046** 0.048** 0.050**(0.020) (0.021) (0.021)

Firm age −0.003* −0.004* −0.004*(0.002) (0.002) (0.002)

Stock turnover 0.729*** 0.729*** 0.730***(0.057) (0.058) (0.058)

No. of IPO monthly 0.007*** 0.006*** 0.006***(0.002) (0.002) (0.002)

Industry control control controlInverse Mills ratio 0.044 0.066 0.067

(0.086) (0.088) (0.089)Negative media reports dummy −0.040 0.000

(0.026) (0.000)Ratio of giving to profitsb 0.125 0.048

(0.159) (0.182)Ratio of giving to profits × Negative

media reports dummy0.397**(0.188)

Constant 19.437*** 19.397*** 19.362***(0.435) (0.441) (0.447)

R2 0.458 0.463 0.467ΔR2 0.005 0.004*




Hypothesis 2a predicts a U-shaped relationship between ratio of giving to profits and issuemarket-valuation premium. As shown in model 2, the linear term of ratio of giving to profits isonly marginally significant (β = 0.604, p < 0.10). However, in model 3, we enter both thelinear and square term of ratio of giving to profits; the coefficients on the linear (β = 0.958,p < 0.01) and square term (β = 5.946, p < 0.01) are both significant, strongly supportingHypothesis 2a. For the full range of ratio of giving to profits in the sample (0, 0.6), the overallrelationship is a ‘U’. Comparing the variance explained by the models provides furtherevidence of a quadratic giving function. Including both ratio of giving to profits and itssquared term leads to increases in R2 (ΔR2 = 0.013). F-tests on this model suggest thatadding these variables yields better-specified models. Thus, the data strongly supportHypothesis 2a.

Hypothesis 2b predicts that negative media reports about newly issued securitiesmake the U-shaped relationship between ratio of giving to profits and issue market-valuationpremium less salient. The results in model 4 show that the coefficient on the quadratic-by-linear interaction of ratio of giving to profits and negative media reports is positive andsignificant (β = 1.396, p < 0.01), and the coefficient on the quadratic-by-linear interac-tion of ratio of giving to profits squared and negative media reports is negative and significant(β = −9.779, p < 0.01). Furthermore, including the interaction term for ratio of giving toprofits, ratio of giving to profits squared, and negative media reports leads to a better-specifiedmodel because the F-test on the changes in R2 (ΔR2 = 0.009) suggests that the differ-ences are significant.

To gain further insights into these moderating effects, we plot the relationship betweenratio of giving to profits and issue market-valuation premium in Figure 3.[4] The presence of negativemedia reports flattens the negative and positive slopes of ratio of giving to profits on issuemarket-valuation premium (in fact, they reverse). These results support Hypothesis 2b.

In Table IV, the dependent variable is retail market-valuation premium. In the subsequentmodels 1–3, we use equation (3) and sequentially add the independent variable ratio of

050

010

0015

00Is

sue

valu

atio

n pr

emiu

m(M

illio

n R

MB)

.3 .4 .5 .6 .7Ratio of giving to profits (%)

Without negative news at pre-IPO (thin line)With negative news at pre-IPO (thick line)

Note: Graph based on the results shown in the model 4 of table III.

Figure 3. The moderating role of negative media reports and the relationship between corporate philan-thropic giving and IPO issue market-valuation premium



giving to profits and the interaction terms between it and the key moderating variable(negative media reports). Model 3 is the full model including the linear and interaction terms.

Hypothesis 3 predicts a positive relationship between the interaction term of ratio ofgiving to profits with negative media reports and retail market-valuation premium. As shown in model2, the linear term of ratio of giving to profits is not significant for retail market-valuation premium.However, the results in model 3 show that the coefficient on the quadratic-by-linearinteraction of ratio of giving to profits and negative media reports is positive and significant forretail market valuation premium (β = 0.397, p < 0.05). Furthermore, including the interactionterms for ratio of giving to profits and negative media reports leads to a better-specified modelbecause the F-test on the changes in R2 (ΔR2 = 0.004) suggests that the differences aresignificant. These results support Hypothesis 3.

Robustness Tests[5]

Using continuous measures to assess negative media reports. In the main test, we turn negative mediareports into a dummy, which may unnecessarily create a loss of variance. As a robustnesstest, we introduce number of negative media reports to measure the moderating variable andthen substitute a moderating variable in Tables III and IV. When introducing dependentvariable of issue market-valuation premium, the interaction terms of ratio of giving to profits andnegative media reports as well as ratio of giving to profits squared and negative media reports are bothsignificant (β = 1.172, p < 0.01; β = −8.382, p < 0.05, respectively), which are in accordwith the results in Table III. Moreover, retail market-valuation premium significantly posi-tively relates to the interaction term of ratio of giving to profits and negative media reports(β = 0.383, p < 0.05), but not to the linear term of ratio of giving to profits, which is consistentwith the results in Table IV.

The impact of information about corporate philanthropy on institutional subscriptions and IPOpricing. Although the main test introduces the issue market-valuation premium to reflect howmuch capital institutional investors provide to IPO ventures, it does not indicate whetherinformation about corporate philanthropy influences institutional subscriptions or IPOpricing.

Using Table III, which shows that institutional investors perceive high levels of cor-porate philanthropy favourably, we infer that institutional investors also increase theirdemand for IPO shares from issuers that engage in high levels of philanthropy. Con-sequently, institutional investors should buy more IPO shares in these companies,reflected by a low lottery ratio on the issuing market. Here, lottery ratio equals to the ratioof the share allocation to institutional investors to total subscription of institutionalinvestors. Regression results correspond to this prediction that the lottery ratio decreaseswhen ratio of giving to profits increases (β = −0.063, p < 0.01), supporting the idea thatinformation about corporate philanthropy increases institutional investors’ appetite forIPO stocks.

Moreover, issue market-valuation premium has a size element (multiplying by the numberof shares) that distorts how institutional investors price IPOs. To confirm the impact ofinformation about corporate philanthropy on institutional pricing for IPOs, we intro-duce market to book ratio, which is equal to the ratio of offering price to net assets per share.



A high market to book ratio reflects favourable pricing by institutional investors. Ourregression model includes both the linear and square term of ratio of giving to profits, andthey are all significant, which confirms a U-shaped relationship between ratio of giving toprofits and institutional investors’ evaluation of IPO stocks.

The results also support the notion that corporate philanthropy promotes institutionalsubscriptions for IPO stocks, though there is a U-shaped relationship with institutionalpricing. Thus, the impact of corporate philanthropy on institutional investors’ buyingbehaviour functions on two different levels: subscription of and pricing for IPO stocks.An increasing level of corporate philanthropy increases institutional subscriptions.However, being ‘stuck in the middle’, or giving below the inflection point, discouragesinstitutional investors from giving high valuations to IPOs.

The impact of corporate philanthropy on institutional investor valuation premium. As we note,underwriters allocate IPO shares to individual investors. To confirm the U-shapedrelationship between information about corporate philanthropy and institutionalpricing, we introduce institutional investor valuation premium to confirm the results. Thevariable equals the difference between the pre-IPO book value per share and the IPOissue price, multiplied by the number of IPO shares sold to institutions. A large institutionalinvestor valuation premium reflects a large amount of institutional capital in an IPO. Weduplicate the models shown in Table III; the results are consistent with the results inTable III. It is clear that investors evaluate IPO ventures in a U-shaped manner accord-ing to the presence of information about corporate philanthropy.

Testing the impact of media reports on retail investors’ buying behaviour. We assume that mediacoverage of IPOs significantly influences retail investors’ buying behaviour in the sec-ondary market. To justify that assumption, we run several regression models to test therelationship between media reports and retail market-valuation premium. We also introducemedia coverage and tenor of media reports.

The results show a significant positive relationship between media coverage and retailmarket-valuation premium (β = 0.025, p < 0.01). This suggests that the more the mediacovers an IPO, the higher its retail market-valuation premium. Moreover, there is a positiverelationship between tenor of media reports and retail market-valuation premium (β = 0.051,p < 0.10), which corresponds with the negative relationship between number of negativemedia reports and retail market-valuation premium (β = −0.088, p < 0.01).

According to the results, we find that media coverage has a fundamental impact onretail investors’ buying behaviour but not on institutional investors’ buying behaviour,which is consistent with our assumption that retail investors are less informed, lessanalytically skilled, and demonstrate attention-grabbing buying behaviour. Thus, theresults substantiate our assumption that negative media reports motivate retail investorsto seek information that disproves the negative media reports and justifies their invest-ment decision. Simply speaking, doing ‘good’ is not enough; doing ‘good’ after a ‘bad’IPO is what really increases the retail market-valuation premium.

Control for the sample-selection bias of donation sample. Because of the need to log-transform thedonation amounts (e.g., Brown et al., 2006), previous studies, such as Wang and Qian



(2011), confine their samples to those reporting non-zero corporate giving. To checkwhether including non-philanthropic firms (samples reporting zero corporate giving)influences our results, we limit the sample to new firms authorized by the CSRC thatactually engage in charitable activities. This sample includes 133 firms (50 per cent of theoriginal sample). We therefore use a two-stage Heckman selection model (Heckman,1979) to correct for any sample-selection bias.

A bivariate probit model fits a maximum-likelihood two-equation probit model inwhich we calculate the bivariate predicted probability of probability (IPO authoriza-tion = true, corporate donation = true). The corporate donation dummy equals 1 if a corpo-ration engages in corporate philanthropy; it equals 0 otherwise. IPO authorization dummyequals 1 if the issuer has CSRC authorization; otherwise, it equals 0. We calculate anadjustment term – inverse Mills ratio – from the first-stage bivariate probit regression. Wethen include inverse Mills ratio as a control variable in the main second-stage equation (seeHeckman, 1979), which examines the relationship between corporate giving and IPOperformance using a sample of new issuers that engage in corporate giving and haveCSRC authorization (133 firms). We duplicate the models in Tables II, III, and IV, andrun the results after controlling for the selection bias of non-zero donating samples. Theresults still support our proposed hypotheses, except for Hypothesis 1a (a negativecoefficient but not significant).

DISCUSSION

Research in corporate philanthropy has a mixed understanding of the relationshipbetween corporate philanthropy and CFP (e.g., Aguinis and Glavas, 2012; Margolis andWalsh, 2003; Margolis et al., unpublished data). In this study, we respond to recent callsfor attention to the intermediate outcomes of corporate philanthropy (e.g., Devinney,2009; Margolis et al., unpublished data; Peloza, 2009) and extend the stream of researchby theoretically and empirically identifying how information about corporate philan-thropy affects stakeholder behaviour.

Using the IPO market, we demonstrate that information about corporatephilanthropy influences how much agents support IPOs in the preparation stage, howinstitutional investors value IPOs at issuance, and how retail investors buy shares on thefirst trading day. We also examine how these influences vary within corporations andfind that the effects of corporate philanthropy change when we account for pre-IPOnegative media reports. Table V summarizes the results.

Theoretical Implications

Contributions to signalling theory. Signalling theory is popular among management scholars(Connelly et al., 2011). However, a social-constructivist view of signalling might considersignals within their social context (Burr, 2003). The meaning of signals is a function notonly of individual interpretation but also of collective beliefs about the signals. We extendthe research along this line by integrating investment time horizons with the Chinesecontext to explore why various stakeholders interpret the same information of corporatephilanthropy differently.



Individual expectations influence their interpretations of signals (Connelly et al.,2011). We extend the research along this line by mapping how corporate philanthropyinfluences the way stakeholders with different investment time horizons react to IPOs.We then translate this into tangible advice for the preparation, issuance, and tradingstages in the IPO market.

In the IPO-preparation stage, we focus on how information about corporate philan-thropy influences IPO agents’ willingness to cooperate with an issuer. Our analysis showsthat underwriters have better access to information about corporate philanthropy andhold short-term investment time horizons, but only non-prestigious underwriters evalu-ate information about corporate philanthropy favourably. Consequently, non-prestigious underwriters are more likely to lead IPOs that disclose information aboutcorporate philanthropy (Hypothesis 1a). VCs are also aware of information about cor-porate philanthropy, but they too hold short-term investment time horizons (Arthurset al., 2008). However, VCs acquire less benefit from corporate philanthropy and thusdevalue it. Our results show that VCs are therefore less likely to make large investmentsin companies that engage in corporate philanthropy (Hypothesis 1b). Other IPO agents,such as accountants and lawyers, are also aware of information about corporate philan-thropy and hold short-term investment horizons. Our results confirm, however, that IPOagents prefer corporate philanthropy and charge lower fees to issuers that engage in it(Hypothesis 1c).

Second, we identify the U-shaped manner in which institutional investors react tocorporate philanthropy information during the IPO-issuance stage (Hypothesis 2a). Weassume institutional investors have access to information about corporate philanthropyand possess a long-term investment time horizon. We argue that corporate philanthropybelow the inflection point hinders the market-valuation premium because institutionalinvestors perceive corporate philanthropy as a waste of scarce resources; however,corporate philanthropy over the inflection point can achieve long-term benefits becauseit creates stakeholder support (Barnett, 2007) and generates moral capital that can helpcompanies resist future negative shocks (Godfrey, 2005). Following this logic, institu-tional investors prefer IPOs that engage in high levels of corporate philanthropy.

Table V. Summary of results for all relationships

Predictor Prestigious agents and financing costs Issue market-valuationpremium

Retail market-valuationpremiumUnderwriter

prestigeVC-backedshareholding

IPO financingcosts

Ratio of giving to profits Negativea Negative Negative U-shaped –Ratio of giving to profits × Negative

media reports– – – Positive Positive

Ratio of giving to profitssquared × Negative media reports

– – – Negative –

a Marginally significant result (p < 0.10, two-tailed test).



Robustness tests support this notion of a U-shaped relationship between corporatephilanthropy and IPO pricing for institutional investors.

Third, during the IPO-trading stage, we elaborate on how information about corpo-rate philanthropy influences retail investors’ buying behaviour. Our results show thatnegative media reports help solve their awareness problem and consequently motivatethese investors, who are relatively uninformed about corporate philanthropy, to buyIPOs that are the subject of negative media reports (Hypothesis 3).

Furthermore, we illustrate a stigma view of corporate philanthropy within China thatillegitimate IPO ventures donate to government agencies in order to avoid inspectionfrom authorities. Disclosures about corporate philanthropy thus can be negative signalsabout IPO firms’ political risks that discourage prestigious underwriters and VCs fromgetting involved with these issuers (Hypotheses 1a and 1b). We recognize that thesefindings seem to contradict existing literature that emphasizes the benefits of corporatephilanthropy (e.g., Dhaliwal et al., 2011; Wang and Qian, 2011). However, the Chinesecontext helps to understand how audiences in Western countries and China interpret thesame signals differently. The results demonstrate that without understanding a society’smarket specifications and characteristics, it is easy to misunderstand corporate philan-thropy and its implications for managing specific stakeholder behaviour in a complexsocial system.

Moreover, our study also helps extend Western theories to Eastern countries.Although stakeholder theory stipulates a U-shaped relationship between corporate phi-lanthropy and how institutional investors evaluate IPOs (Hypothesis 2a), a stigma viewof Chinese corporate philanthropy explains why institutional investors perceive an IPOventure’s corporate philanthropy as a signal of uncertain post-IPO performance. Onereason for this is that issuers, engaging in corporate giving before IPOs, have to under-take additional social burdens to avoid inspection from authorities after an IPO.Although negative media reports feed retail investors’ perceived uncertainty about IPOs(e.g., Pollock and Rindova, 2003), a stigma view of corporate philanthropy helps mitigatesuch perception because government agencies are unwilling to inspect their supporters.Consequently, retail investors assign more value to IPO issuers that are subject tonegative media reports but engage in corporate philanthropy (Hypothesis 3).

The study also helps understand how negative signals enhance issuers’ intentionalsignalling processes (Bell et al., 2008). We find that negative media reports moderate therelationship between corporate philanthropy and market valuation premiums, whichgives a more complete understanding of different stakeholder reactions to informationabout corporate philanthropy among IPO firms.

First, we offer new insight into how negative media reports alter the impact ofcorporate philanthropy on IPO performance at the issuance stage (Hypothesis 2b). Ourresults show that when corporations are the subject of negative media reports, institu-tional investors perceive information about corporate philanthropy much more favour-ably, and the negative slope between corporate giving and market-valuation premiumsflattens. However, when these same corporations engage in corporate philanthropy overthe inflection point, institutional investors devalue corporate philanthropy, which flattensthe positive slope between corporate giving and market-valuation premiums (as shown inFigure 3).



Second, during the first day of trading, the influence of corporate philanthropy on theretail market is not significant. This is largely because retail investors generally are toounsophisticated to collect and interpret the information. However, negative mediareports enhance the signalling process of philanthropy information and actually helpissuers create more ‘hype’ (Hypothesis 3). Moreover, the robustness tests supplement theview that retail investors demonstrate attention-grabbing buying behaviour and thatmedia reports drive that behaviour profoundly.

Contributions to corporate philanthropy–CFP literatures. Unlike previous corporate philan-thropy studies, which mainly propose that large, established firms use corporate philan-thropy to improve CFP (e.g., Wang and Qian, 2011; Wang et al., 2008), this paperextends this literature in five directions. First, it focuses on the intermediate benefits ofcorporate philanthropy and assumes an indirect relationship between corporate philan-thropy and CFP by illustrating how it affects specific stakeholders’ behaviour in the IPOmarket. Second, in response to a dearth of studies of corporate philanthropy at theindividual level (Aguinis and Glavas, 2012), we articulate the mechanisms through whichcorporate philanthropy influences the behaviour of specific IPO agents. Third, weintroduce the concept of awareness of corporate philanthropy information (Schuler andCording, 2006) and stakeholder time horizons (Arthurs et al., 2008) to model stakeholderbehaviours. We specify the importance of the interaction between these two constructs tounderstand specific stakeholder reactions to information about corporate philanthropy.Fourth, we account for the entrepreneurial aspects of young firms (highly risky futuresand the need for stakeholder support), and we integrate these to explore the relationshipsbetween philanthropy and IPO performance during the IPO preparation, issuance, andtrading stages. Finally, this study satisfies the four criteria proposed by Margolis et al.(unpublished data) for guiding future research on the relationship between corporatephilanthropy and its economic consequences.

Contributions to IPO literature. Previous studies notice the important role of corporatephilanthropy in the IPO market. For example, Ritter and Welch comment that ‘it isunclear why underpricing is a more efficient signal than, say, committing to spend moneyon charitable donations’ (Ritter and Welch, 2002, p. 1803). However, and to oursurprise, no studies test the impact of corporate philanthropy on IPO performance.Thus, this study pioneers a test of the relationships between corporate philanthropy andIPO performance in entrepreneurial firms and provides an innovative understanding ofcorporate philanthropy as an important antecedent of IPO performance.

Practical Implications

In addition to these theoretical implications, our study has significant implications forentrepreneurs – especially for those contemplating or going through the IPO process ina transitional economy. Understanding the dynamics and influences of corporate phi-lanthropy in IPO markets is critical to garnering all the resources possible from an IPOsuccessfully.



First, the results suggest that at the IPO preparation stage, information about corpo-rate philanthropy attracts non-prestigious underwriters, but VCs are unlikely to invest inhighly philanthropic companies. However, corporate philanthropy reduces IPO financ-ing costs. Thus, entrepreneurs should consider engaging in philanthropy and disclosingit in their prospectuses because, on average, philanthropy eliminates the prestige trap.For example, prestigious underwriters privately benefit by underpricing the IPO stock(Arthurs et al., 2008). Engaging in and disclosing philanthropy also prevents cedingcontrol to VCs – control that can be detrimental to corporate survival (Fischer andPollock, 2004) – and reduces IPO costs.

Moreover, at the issuance stage, corporate philanthropy influences market-valuationpremiums in a U-shaped manner. This suggests that corporations should avoid the ‘stuckin the middle’ paradox to achieve higher market-valuation premiums. Especially inemerging markets such as China, where the government lacks sufficient funds to under-take enormous social affairs, governments turn to corporations for support. IPO venturesshould recognize that institutional investors have stigmatized corporate giving and per-ceive greater post-IPO uncertainty if companies engage in corporate philanthropy toingratiate themselves with the government. After an IPO, because the governmentagencies know the ventures have a lot of capital, they may ask for more donations,thereby financially burdening and distracting the company. However, institutional inves-tors do not underestimate the competitive benefits of philanthropy and the fact that it cancultivate good relationships with government agencies.

We also provide necessary details for managers who want to establish an optimal levelof corporate philanthropy for their companies. Corporations with pre-IPO negativemedia reports should engage in corporate philanthropy around the inflection point.Generosity from ‘bad’ IPO ventures is detrimental to acquiring good market perfor-mance. In other words, IPO ventures that are the subject of negative media reportsshould engage in corporate philanthropy, but not to an extreme degree.

The relationship between corporate philanthropy and retail market-valuation pre-miums shows that only corporations with negative news coverage garner retail market-valuation premiums from philanthropy. In other words, doing ‘good’ after being ‘bad’increases the retail market-valuation premium.

Taken together, the results indicate that managers should consciously choosetheir corporate philanthropy strategies rather than monotonically increase corporatephilanthropy.

Limitations and Future Research Directions

Like any study, this one has limitations. First, collecting data from a transitional economyrestrains the ability to apply findings to other countries. To support our arguments, weintroduce a stigma view of Chinese corporate philanthropy, which emphasizes thatcorporations ingratiate themselves with the government through engaging in philan-thropic giving to avoid government inspections (e.g., Jia and Zhang, 2013a). There areat least two conditions forming such a view of corporate philanthropy in a society: on theone hand, governmental agencies control scarce resources (e.g., approval of IPOs) thatare fundamentally important to companies; on the other hand, government needs



corporate aid to fund social services. However, those conditions may not hold in Westerncountries.

Second, we decompose the relationship between corporate philanthropy and CFP byfocusing on IPO performance, which does not consider other possible intermediateoutcomes, such as debt-financing costs, market development, and employee loyalty.Third, other contingent factors moderate the relationship between corporate philan-thropy and IPO performance besides the negative media reports. Fourth, although we followSchuler and Cording (2006) and assume the stakeholders in the Chinese IPO market actin their own best interests, what values stakeholders really hold needs further examina-tion. Fifth, we assume that the association between corporate philanthropy and IPOperformance represents high levels of attention by investors but we do not actuallymeasure attention to corporate philanthropy by investors.

Following Da et al. (2011), we try to measure investors’ attention directly via Googlesearch frequency. However, when we combine a corporate name with philanthropy (ChinaPetroleum philanthropy, for example) and search in Google Trends (e.g., ‘中国石油捐款’),the most frequent result is ‘Not enough search volume to show graphs’. Google exitedmainland China in 2010, and Baidu (http://www.baidu.com) now dominates theChinese information search, which limits the ability to measure Chinese investors’interest in information about corporate philanthropy. Finally, these results are based onyoung, entrepreneurial firms. Whether the findings hold for other types of firms is notclear.

Future research should pursue the following avenues. First, this study establishes aframework for studying the intermediate outcomes of corporate philanthropy; whetherand how this framework applies to other outcomes is ripe for study. Second, howpre-IPO corporate philanthropy influences post-IPO corporate philanthropy and howpost-IPO corporate philanthropy influences follow-up financing costs (e.g., seasonedequity offerings) and performance are worthy of study. Third, data from other countrieswould be helpful to generalize the findings. Finally, further studies that directly measurestakeholders’ attention to IPO ventures’ philanthropy information would be very helpfulfor substantiating our assumptions about stakeholders’ awareness of that signal.

CONCLUSION

This study evaluates the intermediate outcomes of corporate philanthropy by testing therelationship between corporate philanthropy and IPO performance. We theorize theimpact of corporate philanthropy on stakeholder behaviour during the three IPO stages,and we propose three major hypotheses. Our results support our hypotheses. Put simply,the availability of information about corporate philanthropy encourages the use ofnon-prestigious underwriters, discourages VC investment, and motivates IPO agents toreduce their fees. Moreover, institutional investors value IPOs in a U-shaped manner,and firms subject to pre-IPO negative media reports should engage in corporate philan-thropy (but not too much) in order to achieve higher market-valuation premiums.However, once an IPO begins trading, information about corporate philanthropy onlyencourages retail investors to buy the stock if the issuer is already the subject of negativemedia reports.



http://www.baidu.com

This study thus builds a model of stakeholder behaviour that explains how the sameinformation about corporate philanthropy leads to different stakeholder reactions in theIPO market. Based on our framework, future studies can bring new insights by exam-ining other outcomes of corporate philanthropy in various sociopolitical contexts.

ACKNOWLEDGMENTS

The authors express their appreciation to editor Professor André Spicer and three anonymous reviewers fortheir suggestions and comments. However, the authors are responsible for all errors in the paper. This studywas funded by grants from the National Natural Science Foundation of China (No. 71372065; No.71272002; No. 71002049), the Supported by Program for New Century Excellent Talents in University (No.NCET-11-0816; No. NCET-12-0439), and Technology Foundation for Selected Overseas Chinese Scholar(No. 18920004). We also thank the Program for Star of Shaanxi Youth Science and Technology (No.2013KJXX-52).

NOTES

[1] Due to missing data, we lost two samples.[2] Following Akien and West (1991), ratio of giving to profits is mean-centred prior to creating the square term

in order to reduce potential multicollinearity. Because there is very high correlation between the squareterm and its constituent, we apply the residual centring procedure ( Jong et al., 2005; Lance, 1988)to handle multicollinearity between the square term (e.g., X2) and its constituent (e.g., X). This procedurehas two stages: first, regress the square term on its component; then, use the residuals instead of theoriginal square term in the data analyses ( Jong et al., 2005; Lance, 1988).

[3] Please refer to the variable definitions and Figure 1 for details.[4] Because we introduce residual-centring procedures to handle the square terms of ratio of giving to profits

and log-transform both the ratio of giving to profits and issue market valuation premium, we do some simplecalculations and graph Figure 3 based on their original values.

[5] Due to page limits, we do not present the tables of regression results. However, they are available onrequest.

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Donating Money to Get Money: The Role of Corporate Philanthropy …sslab.nwpu.edu.cn/uploads/1540469333-5bd1b255d2604.pdf · 2018. 10. 25. · corporate philanthropy and CFP; however,